For Professional Accountants

Code of Ethics
Nature of Ethics

 Study of moral principles and values that govern

the actions and decisions of an individual or group.
 A branch of philosophy that deals with the study of
the rightness or wrongness of human actions; can
focus either on society as a whole or on a particular
group within the society.
 Professional ethics extend beyond moral
principles. They include standards of behavior for a
professional person that are designed for both
practical and idealistic purposes.
Nature of Ethics

 A mixture of moral and practical concept, with a

sprinkling of exhortation to ideal conduct
designed to invoke “right action” on the part of
the members of the profession concerned – all
reduced to rules which are intended to be
enforceable, to some extent at least, by
disciplinary action.
(Ethical Standards of the
Accounting Profession, AICPA,
1966)
The Need for Professional Ethics
 Professional ethics are imposed by a profession on its
members, who voluntarily accept standards of
professional behavior more rigorous than those
required by law.
 A code of ethics significantly affects the reputation of
a profession and the confidence in which it is held.
 Such Codes attempt to:
 Ensure high standards of competence among a group’s
members
 Regulate and strengthen their relationships
 Promote and protect the image of the profession and the
welfare of the community
Ethical Dilemma
 Ethical dilemma is a situation that an individual faces
involving a decision about appropriate behavior.
 Involves a situation in which the welfare of one or
more individuals is affected by the decision
 While personal ethics vary from individual to
individual, most people within are able to agree about
what is considered ethical and unethical behavior.
 Accountants have their own honor system which is
called the Code of Ethics for Professional Accountants
in the Philippines.
International Code of Ethics for
Professional Accountants
 Developed by the International Ethics
Standards Board for Accountants (IESBA)
 Objective of the IESBA : serve the public
interest by setting high-quality ethics
standards for professional accountants.
International Code of Ethics for
Professional Accountants

Purpose of the Code

 Sets out fundamental principles of ethics for professional
accountants, w/c establish the standard of behavior
expected of a professional accountant.
 Provides a conceptual framework that professional
accountants are to apply in order to identify, evaluate and
address threats to compliance with the fundamental
principles.
 In the case of audits, reviews and other assurance
engagements, the Code sets out International
Independence Standards
International Code of Ethics for
Professional Accountants
 See overview of code
International Code of Ethics for
Professional Accountants
Effective Date Parts 1-3
• Parts 1, 2 and 3 will be effective as of June 15, 2019.
International Independence Standards (Parts 4A and 4B)
• Part 4A relating to independence for audit and review
engagements will be effective for audits and reviews of
financial statements for periods beginning on or after June
15, 2019.
• Part 4B relating to independence for assurance
engagements with respect to subject matter covering periods
will be effective for periods beginning on or after June 15,
2019; otherwise, it will be effective as of June 15, 2019.
Relevant Provisions

 Code provisions most relevant to auditors

are:
 Part 1: Complying with the code,
fundamental principles and conceptual
framework
 Part 3: Professional accountants in public
practice
 Part 4a: Independence for audit and review
engagements
 PART 1
PART 1 COMPLYING WITH THE CODE,
FUNDAMENTAL PRINCIPLES AND
CONCEPTUAL FRAMEWORK
100 Complying with the Code
110 The Fundamental Principles
111 Integrity
112 Objectivity
113 Professional Competence & Due Care
114 Confidentiality
115 Professional Behavior
120 The Conceptual Framework
Section 100: Complying with Code
 A distinguishing mark of the accountancy
profession is its acceptance of the
responsibility to act in the public interest.
Therefore, a professional accountant’s*
responsibility is not exclusively to satisfy the
needs of an individual client or employer. In
acting in the public interest a professional
accountant should observe and comply with
the ethical requirements of this Code
The Fundamental Principles
 Integrity
 Objectivity
 Professional Competence and Due Care
 Confidentiality
 Professional Behavior
Integrity
 Obligation to be straightforward and honest in professional
and business relationships.
 Fair dealing and truthfulness
Objectivity
 Obligation not to compromise their professional or business
judgment because of bias, conflict of interest or the undue
influence of others.
Professional Competence and Due Care

 Obligation to attain and maintain professional knowledge

and skill to be able to provide competent professional
services to clients or employers
 To act diligently in accordance with applicable technical and
professional standards when providing professional services
Confidentiality
 To respect the confidentiality of information acquired as a
result of professional and business relationships. (
 Obligation to refrain from disclosing confidential information
without proper and specific authority unless there is legal or
professional right or duty to disclose.
 Prohibits the use of confidential information acquired in the
course of providing professional services to their personal
advantage or the advantage of third parties.
Exceptions to the Rule of
Confidentiality
 Disclosure is permitted by law or authorized by the client or
employer
 Disclosure is required by law (litigation)
 Professional duty or right to disclose when not prohibited by law.
Professional Behavior
 Obligation to comply with relevant laws and regulations and
avoid any action that may bring discredit to the profession.
Conceptual Framework

 The circumstances in which professional

accountants operate may give rise to specific
threats to comply with the fundamental
principles.
 The conceptual framework specifies an approach
for a professional accountant to: (a) Identify
threats to compliance with the fundamental
principles; (b) Evaluate the threats identified;
and (c) Address the threats by eliminating or
reducing them to an acceptable level
Threats to Compliance with the
Fundamental Principles
 Self – Interest Threat
 Self – Review Threat
 Advocacy Threat
 Familiarity Threat
 Intimidation Threat
Self – Interest Threat

 Occur as a result of a financial interest of a

professional accountant or of an immediate
or close family member.
 Examples:
 Having a direct financial interest or a material indirect financial interest in the
client.
 Having a loan from the client
 Excessive reliance on revenue from a single attest client
 Having a material joint venture with the client
 Potential employment from client
Self – Review Threat

 Occur when a previous judgment needs to be

re-evaluated by the professional accountant
responsible for that judgment.
 Example:
 The CPA firm has provided nonaudit services relating to the information
system and the accountant is now considering results obtained from that
information system in the audit
Advocacy Threat

 Occur when a professional accountant

promotes a position or opinion to the point
that subsequent objectivity may be
compromised.
 Examples:
 Promoting client securities as part of an initial public offering
 Representing a client in litigation, tax court or disputes with third parties
Familiarity Threat
 Occur when, because of a close
relationship, a professional accountant
becomes too sympathetic to the
interest of others
 Examples:
 A spouse or a close friend holds a key position with the client
 A partner has provided attest services for a prolonged period
 An accountant performs insufficient audit procedures when
considering the results of a nonattest service performed by the
accountant’s firm
 An accountant for the CPA firm recently was a director or officer of
the client firm
 Accepting gifts or preferential treatment of significant value from
the client.
Intimidation Threat

 Occur when a professional accountant may

be deterred from acting objectively by
threats, actual or perceived
 Examples:
 Threat to replace firm over a disagreement with the application of an
accounting principle
 Pressure to reduce audit procedures for purpose of reducing audit fees
 Being threatened with litigation
Evaluating Threats

 When the professional accountant identifies a

threat to compliance with the fundamental
principles, the accountant shall evaluate
whether such a threat is at an acceptable level.
 An acceptable level is a level at which a
professional accountant using the reasonable
and informed third party test would likely
conclude that the accountant complies with
the fundamental principles
Addressing Threats
 If the professional accountant determines that the
identified threats to compliance with the fundamental
principles are not at an acceptable level, the accountant
shall address the threats by eliminating them or
reducing them to an acceptable level.
 The accountant shall do so by: (a) Eliminating the
circumstances, including interests or relationships, that
are creating the threats; (b) Applying safeguards, where
available and capable of being applied, to reduce the
threats to an acceptable level; or (c) Declining or ending
the specific professional activity.
Considerations for Audits, Reviews and
Other Assurance Engagements
 Professional accountants in public practice are required by International
Independence Standards to be independent when performing audits,
reviews, or other assurance engagements. Independence is linked to the
fundamental principles of objectivity and integrity.
 Independence comprises
 :(a) Independence of mind – the state of mind that permits the expression
of a conclusion without being affected by influences that compromise
professional judgment, thereby allowing an individual to act with
integrity, and exercise objectivity and professional skepticism.
 (b) Independence in appearance – the avoidance of facts and
circumstances that are so significant that a reasonable and informed
third party would be likely to conclude that a firm’s or an audit or
assurance team member’s integrity, objectivity or professional
skepticism has been compromised
Considerations for Audits, Reviews and
Other Assurance Engagements
 Under auditing, review and other assurance
standards, professional accountants in public
practice are required to exercise professional
skepticism when planning and performing audits,
reviews and other assurance engagements
 In an audit of financial statements, compliance
with the fundamental principles, individually and
collectively, supports the exercise of professional
skepticism
 Part 3
PART 3 PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
300 Applying the Conceptual Framework – Professional
Accountants in Public Practice
310 Conflicts of Interest
320 Professional Appointments
321 Second Opinions
330 Fees and Other Types of Remuneration
340 Inducements, including Gifts and Hospitality
350 Custody of Client Assets
360 Responding to Non-Compliance with Laws & Regulations
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

 Identifying threats – as previously discussed

APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Evaluating Threats
 Consider client & its operating environment
For example, providing a non-assurance service to
an audit client that is a public interest entity might
be perceived to result in a higher level of threat
- May also consider corporate governance structure
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Evaluating Threats
 Consider firm & its operating environment
 Examples:
 Leadership of the firm that promotes compliance with the
fundamental principles and establishes the expectation that
assurance team members will act in the public interest.
 Policies or procedures for establishing and monitoring
compliance with the fundamental principles by all
personnel.
 Management of the reliance on revenue received from a
single client.
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Evaluating Threats
 Consideration of new information or changes in
facts/circumstances
Examples:
 When the scope of a professional service is expanded.
 When the client becomes a listed entity or acquires
another business unit.
 When there is a change in the professional
accountant’s personal or immediate family
relationships.
APPLYING THE CONCEPTUAL FRAMEWORK –
PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE

Addressing Threats
Examples of safeguards:
 Assigning additional time and qualified personnel to
required tasks when an engagement has been accepted
might address a self-interest threat.
 Having an appropriate reviewer who was not a member of
the team review the work performed or advise as necessary
might address a self-review threat.
 Using different partners and engagement teams with
separate reporting lines for the provision of non-assurance
services to an assurance client might address self-review,
advocacy or familiarity threats.
CONFLICTS OF INTEREST

 A conflict of interest creates threats to compliance with

the principle of objectivity and might create threats to
compliance with the other fundamental principles.
 Such threats might be created when:
 (a) A professional accountant provides a professional service
related to a particular matter for two or more clients whose
interests with respect to that matter are in conflict; or
 (b) The interests of a professional accountant with respect to
a particular matter and the interests of the client for whom
the accountant provides a professional service related to that
matter are in conflict.
CONFLICTS OF INTEREST
 Examples :
● Providing a transaction advisory service to a client
seeking to acquire an audit client, where the firm has
obtained confidential information during the course of
the audit that might be relevant to the transaction.
● Providing advice to two clients at the same time where
the clients are competing to acquire the same company
and the advice might be relevant to the parties’
competitive positions.
● Providing services to a seller and a buyer in relation to
the same transaction.
CONFLICTS OF INTEREST

Conflict Identification
 Before accepting a new client relationship, engagement, or
business relationship, a professional accountant shall take
reasonable steps to identify circumstances that might create a
conflict of interest
 A professional accountant shall remain alert to changes over time
in the nature of services, interests and relationships that might
create a conflict of interest while performing an engagement.
 If the firm is a member of a network, a professional accountant
shall consider conflicts of interest that the accountant has reason
to believe might exist or arise due to interests and relationships
of a network firm
CONFLICTS OF INTEREST
Threats Created by Conflicts of Interest
 In general, the more direct the connection between the
professional service and the matter on which the parties’ interests
conflict, the more likely the level of the threat is not at an
acceptable level.
 Examples of safeguards to address threats created by a conflict of
interest :
● Having separate engagement teams who are provided with clear
policies and procedures on maintaining confidentiality.
● Having an appropriate reviewer, who is not involved in providing
the service or otherwise affected by the conflict, review the work
performed to assess whether the key judgments and conclusions
are appropriate
CONFLICTS OF INTEREST

Disclosure and Consent

 A professional accountant shall exercise professional judgment to
determine whether the nature and significance of a conflict of
interest are such that specific disclosure and explicit consent are
necessary when addressing the threat created by the conflict of
interest
 Disclosure & consent might take ff. forms:
 General disclosure to clients of circumstances where, as is common
commercial practice, the professional accountant does not provide
professional services exclusively to any one client
 Specific disclosure to affected clients of the conflict in sufficient detail to
enable the client to make an informed decision and to provide explicit
consent
 Consent might be implied by clients’ conduct
CONFLICTS OF INTEREST
Disclosure and Consent
If a professional accountant has determined that
explicit consent is necessary and the client has
refused to provide consent, the accountant shall
either:
(a) End or decline to perform professional services
that would result in the conflict of interest; or
(b) End relevant relationships or dispose of relevant
interests to eliminate the threat or reduce it to an
acceptable level.
CONFLICTS OF INTEREST

Confidentiality
 A professional accountant shall remain alert
to the principle of confidentiality, including
when making disclosures or sharing
information within the firm or network and
seeking guidance from third parties
CONFLICTS OF INTEREST
 When making specific disclosure for the purpose of obtaining
explicit consent would result in a breach of confidentiality, and
such consent cannot therefore be obtained, the firm shall only
accept or continue an engagement if:
 (a) The firm does not act in an advocacy role for one client in an
adversarial position against another client in the same matter;
 (b) Specific measures are in place to prevent disclosure of confidential
information between the engagement teams serving the two clients; and
 (c) The firm is satisfied that a reasonable and informed third party would
be likely to conclude that it is appropriate for the firm to accept or
continue the engagement because a restriction on the firm’s ability to
provide the professional service would produce a disproportionate
adverse outcome for the clients or other relevant third parties
PROFESSIONAL APPOINTMENTS

Client Engagement & Acceptance

 Threats to compliance with the principles of integrity or
professional behavior might be created, for example,
from questionable issues associated with the client (its
owners, management or activities
 A self-interest threat to compliance with the principle of
professional competence and due care is created if the
engagement team does not possess, or cannot acquire,
the competencies to perform the professional services
 Example of relevant safeguard is assigning sufficient
engagement personnel with the necessary competencies.
PROFESSIONAL APPOINTMENTS

Changes in a Professional Appointment

 A professional accountant shall determine whether
there are any reasons for not accepting an
engagement when the accountant:
(a) Is asked by a potential client to replace another
accountant;
(b) Considers tendering for an engagement held by
another accountant; or
(c) Considers undertaking work that is complementary
or additional to that of another accountant.
PROFESSIONAL APPOINTMENTS

Changes in a Professional Appointment

 If unable to communicate with the existing or
predecessor accountant, the proposed accountant shall
take other reasonable steps to obtain information about
any possible threats
 When an existing or predecessor accountant is asked to
respond to a communication from a proposed
accountant, the existing or predecessor accountant shall:
(a) Comply with relevant laws and regulations governing
the request; and
(b) Provide any information honestly and unambiguously
PROFESSIONAL APPOINTMENTS

Changes in Audit or Review Appointments

In the case of an F/S audit or review, a PA shall request the existing/
predecessor accountant to provide known information regarding which the
proposed accountant needs to be aware before deciding whether to accept
the engagement. Except for the circumstances involving noncompliance or
suspected non-compliance with laws and regulations :
(a) If the client consents to the existing or predecessor accountant disclosing
any such facts or other information, the existing or predecessor accountant
shall provide the information honestly and unambiguously; and
(b) If the client fails or refuses to grant the existing or predecessor accountant
permission to discuss the client’s affairs with the proposed accountant, the
existing or predecessor accountant shall disclose this fact to the proposed
accountant, who shall carefully consider such failure or refusal when
determining whether to accept the appointment
PROFESSIONAL APPOINTMENTS

Client and Engagement Continuance

For a recurring client engagement, a
professional accountant shall periodically
review whether to continue with the
engagement
Using the Work of an Expert
When a professional accountant intends to use
the work of an expert, the accountant shall
determine whether the use is warranted.
SECOND OPINIONS
 A professional accountant might be asked to provide a second
opinion on the application of accounting, auditing, reporting or
other standards or principles to (a) specific circumstances, or (b)
transactions by or on behalf of a company or an entity that is not
an existing client
 Providing a second opinion to an entity that is not an existing
client might create a self-interest or other threat to compliance
with one or more of the fundamental principles
 If an entity seeking a second opinion from a professional
accountant will not permit the accountant to communicate with
the existing or predecessor accountant, the accountant shall
determine whether the accountant may provide the second
opinion sought.
FEES AND OTHER TYPES OF
REMUNERATION
 The level and nature of fee and other remuneration
arrangements might create a self-interest threat to
compliance with one or more of the fundamental
principles
 A professional accountant might quote whatever fee is
considered appropriate. Quoting a fee lower than
another accountant is not in itself unethical. But if it
precludes him from observing standards, it creates a
self-interest threat.
 Safeguards: adjust engagement fee/scope or have a
reviewer review work performed
FEES AND OTHER TYPES OF
REMUNERATION
Contingent Fees
 Contingent fees are used for certain types of non-assurance services.
These might create threats to compliance with the fundamental
principles, particularly a self-interest threat, in certain circumstances
 Safeguards: have reviewer review work, obtain advance agreement
w/ client on basis of remuneration
Referral Fees or Commissions
 A self-interest threat to compliance with the principles of objectivity
and professional competence and due care is created if a PA pays or
receives a referral fee or receives a commission relating to a client.
 Safeguards: advance agreement w/ client on commission
arrangements, disclosure to client of referral fees/commission
arrangements
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
 Offering or accepting inducements might create a self-
interest, familiarity or intimidation threat to compliance with
the fundamental principles, particularly the principles of
integrity, objectivity and professional behavior.
 An inducement is an object, situation, or action that is used as
a means to influence another individual’s behavior, but not
necessarily with the intent to improperly influence that
individual’s behavior.
 Examples: ● Gifts. ● Hospitality. ● Entertainment. ● Political
or charitable donations. ● Appeals to friendship and loyalty. ●
Employment or other commercial opportunities. ●
Preferential treatment, rights or privileges.
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
 PA shall not offer nor accept any inducement
perceived as intended to improperly influence the
behavior of the recipient or of another individual.
 If the PA becomes aware of an inducement offered
with intent to improperly influence behavior,
threats to compliance with the fundamental
principles might still be created even if PA does not
offer nor accept such an inducement
 Safeguards: inform senior mgt., amend/terminate
business relationship w/ client
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
 Examples where offering/accepting inducement might
create threats even if there is no actual or perceived
intent to improperly influence behavior:
● Self-interest threats: PA is offered hospitality from the
prospective acquirer of a client while providing corporate
finance services to the client.
● Familiarity threats: PA regularly takes an existing or
prospective client to sporting events.
● Intimidation threats: PA accepts hospitality from a
client, the nature of which could be perceived to be
inappropriate were it to be publicly disclosed.
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
 To eliminate threats: decline/not offer inducement,
transfer servicing of client to another individual
 Examples of safeguards:
 Being transparent with senior management of the firm
or of the client about offering or accepting an
inducement.
 Reimbursing the cost of the inducement, such as
hospitality, received.
 As soon as possible, returning the inducement, such as a
gift, after it was initially accepted.
INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY
Immediate or Close Family Members
 A PA shall remain alert to potential threats to the accountant’s
compliance with the fundamental principles created by the
offering of an inducement:
(a) By an immediate or close family member of the accountant to an
existing or prospective client of the accountant.
(b) To an immediate or close family member of the accountant by an
existing or prospective client of the accountant.
 Where the PA becomes aware of an inducement being offered to
or made by an immediate/close family member where there is
intent to improperly influence the behavior of the PA or client,
the accountant shall advise the immediate or close family
member not to offer or accept the inducement
CUSTODY OF CLIENT ASSETS
 Holding client assets creates a self-interest or other threat to
compliance with the principles of professional behavior and
objectivity.
 A professional accountant shall not assume custody of client
money or other assets unless permitted to do so by law and
in accordance with any conditions under which such custody
may be taken.
 As part of client and engagement acceptance procedures
related to assuming custody of client money or assets, a
professional accountant shall: (a) Make inquiries about the
source of the assets; and (b) Consider related legal and
regulatory obligations.
CUSTODY OF CLIENT ASSETS

 A professional accountant entrusted with money

or other assets belonging to others shall: (a)
Comply with the laws and regulations relevant to
holding and accounting for the assets; (b) Keep
the assets separately from personal or firm assets;
(c) Use the assets only for the purpose for which
they are intended; and (d) Be ready at all times to
account for the assets and any income, dividends,
or gains generated, to any individuals entitled to
that accounting.
RESPONDING TO NON-COMPLIANCE
WITH LAWS AND REGULATIONS
 A self-interest or intimidation threat to compliance with the
principles of integrity and professional behavior is created
when a professional accountant becomes aware of non-
compliance or suspected noncompliance with laws and
regulations.
 Non-compliance with laws and regulations (“non-
compliance”) comprises acts of omission or commission,
intentional or unintentional, which are contrary to the
prevailing laws or regulations committed by the following
parties: (a) A client; (b) Those charged with governance of a
client; (c) Management of a client; or (d) Other individuals
working for or under the direction of a client.
RESPONDING TO NON-COMPLIANCE
WITH LAWS AND REGULATIONS
 Examples of laws and regulations which this section addresses
include those that deal with: ● Fraud, corruption and bribery. ●
Money laundering, terrorist financing and proceeds of crime. ●
Securities markets and trading. ● Banking and other financial
products and services. ● Data protection. ● Tax and pension
liabilities and payments. ● Environmental protection. ● Public
health and safety.
 When encountering non-compliance or suspected non-
compliance with laws/regulations, the PA shall obtain an
understanding of the legal/regulatory provisions and comply with
them, including: (a) Any requirement to report the matter to an
appropriate authority; and (b) Any prohibition on alerting the
client.
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Responsibilities of All Professional Accountants

Where a PA becomes aware of a matter to
which this section applies, the steps that the
accountant takes to comply with this section
shall be taken on a timely basis. In taking timely
steps, the accountant shall have regard to the
nature of the matter and the potential harm to
the interests of the entity, investors, creditors,
employees or the general public.
RESPONDING TO NON-COMPLIANCE
WITH LAWS AND REGULATIONS

Audits of Financial Statements

Obtaining an Understanding of the Matter
 If a PA engaged to perform an F/S audit becomes aware of
information concerning noncompliance or suspicion thereof,
the accountant shall obtain an understanding of the matter.
 If the PA identifies or suspects that non-compliance has
occurred or might occur, the PA shall discuss the matter with
the appropriate level of management and, where
appropriate, those charged with governance
 If the PA believes that management is involved in the non-
compliance or suspected non-compliance, the accountant
shall discuss the matter with those charged with governance.
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Audits of Financial Statements

Addressing the Matter
In discussing the non-compliance or suspected non-compliance with
management and, where appropriate, those charged with
governance, the PA shall advise them to take appropriate and timely
actions, if they have not already done so, to:
(a) Rectify, remediate or mitigate the consequences of the
noncompliance;
(b) Deter the commission of the non-compliance where it has not
yet occurred; or
(c) Disclose the matter to an appropriate authority where required
by law or regulation or where considered necessary in the public
interest.
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Audits of Financial Statements

Determining Whether Further Action Is Needed
 The PA shall assess the appropriateness of the response of
management and, where applicable, those charged with
governance.
 In light of the response of management and, where
applicable, those charged with governance, the PA shall
determine if further action is needed in the public interest.
 The PA shall exercise professional judgment in determining
the need for, and nature and extent of, further action
RESPONDING TO NON-COMPLIANCE WITH
LAWS AND REGULATIONS

Audits of Financial Statements

Determining Whether to Disclose the Matter to an Appropriate
Authority
 Disclosure of the matter to an appropriate authority would be
precluded if doing so would be contrary to law or regulation
 The determination of whether to make such a disclosure
depends in particular on the nature and extent of the actual or
potential harm that is or might be caused by the matter to
investors, creditors, employees or the general public.
 The determination of whether to make such a disclosure will
also depend on external factors (e.g, protection from
liability/retaliation)
 PART4A: INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS

400 Applying the Conceptual Framework to Independence for Audit and Review
Engagements
410 Fees
411 Compensation and Evaluation Policies
420 Gifts and Hospitality
430 Actual or Threatened Litigation
510 Financial Interests
511 Loans and Guarantees
520 Business Relationships
521 Family and Personal Relationships
522 Recent Service with an Audit Client
523 Serving as a Director or Officer of an Audit Client
524 Employment with an Audit Client
525 Temporary Personnel Assignments
540 Long Association of Personnel (Including Partner Rotation) with an Audit Client
 PART4A: INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS

600 Provision of Non-Assurance Services to an Audit Client

601 Accounting and Bookkeeping Services
602 Administrative Services
603 Valuation Services
604 Tax Services
605 Internal Audit Services
606 Information Technology Systems Services
607 Litigation Support Services
608 Legal Services
609 Recruiting Services
610 Corporate Finance Services
800 Reports on Special Purpose Financial Statements that include a Restriction on Use
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 This Part applies to both audit and review engagements. The terms
“audit,” “audit team,” “audit engagement,” “audit client,” and “audit
report” apply equally to review, review team, review engagement,
review client, and review engagement report.
 In this Part, the term “professional accountant” refers to individual
professional accountants in public practice and their firms.
 Independence is linked to the principles of objectivity and integrity. It
comprises:
 (a) Independence of mind – the state of mind that permits the expression
of a conclusion without being affected by influences
 that compromise professional judgment, thereby allowing an individual
to act with integrity, and exercise objectivity and professional
skepticism. (b) Independence in appearance – the avoidance of facts and
circumstances that are so significant that a reasonable and informed
third party would be likely to conclude that a firm’s, or an audit team
member’s, integrity, objectivity or professional skepticism has been
compromised.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 A firm performing an audit engagement shall be

independent.
 A firm shall apply the conceptual framework set
out in Section 120 to identify, evaluate and
address threats to independence in relation to an
audit engagement.
 As defined, an audit client that is a listed entity
includes all of its related entities.
 Independence, as required by this Part, shall be
maintained during both: (a) The engagement
period; and (b) The period covered by the financial
statements.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 If an entity becomes an audit client during or

after the period covered by the financial
statements on which the firm will express an
opinion, the firm shall determine whether any
threats to independence are created by:
 (a) Financial or business relationships with
the audit client during or after the period
covered by the financial statements but
before accepting the audit engagement; or
 (b) Previous services provided to the audit
client by the firm or a network firm.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 A network firm shall be independent of the audit clients

of the other firms within the network as required by this
Part.
 When associated with a larger structure of other firms
and entities, a firm shall:
 (a) Exercise professional judgment to determine
whether a network is created by such a larger structure;
 (b) Consider whether a reasonable and informed third
party would be likely to conclude that the other firms
and entities in the larger structure are associated in
such a way that a network exists; and
 (c) Apply such judgment consistently throughout such a
larger structure.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 When determining whether a network is created by a larger

structure of firms and other entities, a firm shall conclude that a
network exists when such a larger structure is aimed at co-
operation and:
 (a) It is clearly aimed at profit or cost sharing among the entities
within the structure);
 (b) The entities within the structure share common ownership,
control or management.
 (c) The entities within the structure share common quality control
policies and procedures.
 (d) The entities within the structure share a common business
strategy.
 (e) The entities within the structure share the use of a common
brand name; or
 (f) The entities within the structure share a significant part of
professional resources.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 If a firm or a network sells a component of its practice, and the

component continues to use all or part of the firm’s or
network’s name for a limited time, the relevant entities shall
determine how to disclose that they are not network firms
when presenting themselves to outside parties.
 A firm shall document conclusions regarding compliance with
this Part, and the substance of any relevant discussions that
support those conclusions. In particular:
 (a) When safeguards are applied to address a threat, the firm
shall document the nature of the threat and the safeguards in
place or applied; and
 (b) When a threat required significant analysis and the firm
concluded that the threat was already at an acceptable level,
the firm shall document the nature of the threat and the
rationale for the conclusion.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Mergers and Acquisitions

 An entity might become a related entity of an audit
client because of a merger or acquisition.
 In the above circumstances:
 (a) The firm shall identify and evaluate previous and
current interests and relationships with the related
entity that, taking into account any actions taken to
address the threat, might affect its independence and
therefore its ability to continue the audit engagement
after the effective date of the merger or acquisition; and
 (b) the firm shall take steps to end any interests or
relationships that are not permitted by the Code by the
effective date of the merger or acquisition.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 Mergers and Acquisitions

 If the interest or relationship cannot
reasonably be ended by the effective date of
the merger or acquisition, the firm shall:
 (a) Evaluate the threat that is created by the
interest or relationship; and
 (b) Discuss with those charged with
governance the reasons why the interest or
relationship cannot reasonably be ended by
the effective date and the evaluation of the
level of the threat.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Mergers and Acquisitions

If, following the discussion set out in the previous paragraph,
those charged with governance request the firm to continue as
the auditor, the firm shall do so only if:
(a) The interest or relationship will be ended as soon as
reasonably possible but no later than six months after the
effective date of the merger or acquisition;
(b) Any individual who has such an interest or relationship,
including one that has arisen through performing a non-
assurance service that would not be permitted by Section 600
and its subsections, will not be a member of the engagement
team for the audit or the individual responsible for the
engagement quality control review; and
(c) Transitional measures will be applied, as necessary, and
discussed with those charged with governance.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Breach of an Independence Provision

 If a firm concludes that a breach of a requirement in
this Part has occurred, the firm shall:
 (a) End, suspend or eliminate the interest or
relationship that created the breach and address the
consequences of the breach;
 (b) Consider whether any legal or regulatory
requirements apply to the breach and, if so:
 (i) Comply with those requirements; and
 (ii) Consider reporting the breach to a professional or
regulatory body or oversight authority if such reporting is
common practice or expected in the relevant jurisdiction;
(cont’d next slide)
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

(c) Promptly communicate the breach in accordance with its policies

and procedures to:
(i) The engagement partner;
(ii) Those with responsibility for the policies and procedures relating
to independence;
(iii) Other relevant personnel in the firm and, where appropriate, the
network; and
(iv) Those subject to the independence requirements in Part 4A who
need to take appropriate action;
(d) Evaluate the significance of the breach and its impact on the
firm’s objectivity and ability to issue an audit report; and
(e) Depending on the significance of the breach, determine:
(v) Whether to end the audit engagement; or
(vi) Whether it is possible to take action that satisfactorily addresses
the consequences of the breach and whether such action can be
taken and is appropriate in the circumstances.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

Breach of an Independence Provision

 If the firm determines that action cannot be
taken to address the consequences of the
breach satisfactorily, the firm shall inform those
charged with governance as soon as possible
and take the steps necessary to end the audit
engagement in compliance with any applicable
legal or regulatory requirements. Where ending
the engagement is not permitted by laws or
regulations, the firm shall comply with any
reporting or disclosure requirements.
Applying the Conceptual Framework to
Independence for Audit and Review Engagements

 If the firm determines that action can be taken to address

the consequences of the breach satisfactorily, the firm shall
discuss with those charged with governance:
 (a) The significance of the breach, including its nature and
duration;
 (b) How the breach occurred and how it was identified;
 (c) The action proposed or taken and why the action will
satisfactorily address the consequences of the breach and
enable the firm to issue an audit report;
 (d) The conclusion that, in the firm’s professional judgment,
objectivity has not been compromised and the rationale for
that conclusion; and
 (e) Any steps proposed or taken by the firm to reduce or
avoid the risk of further breaches occurring.
 FEES
 The nature and level of fees or other types of remuneration
might create a self-interest or intimidation threat.
Fees – Relative Size
 When the total fees generated from an audit client by the
firm expressing the audit opinion represent a large
proportion of the total fees of that firm, the dependence on
that client and concern about losing the client create a self-
interest or intimidation threat.
 An example of an action that might be a safeguard to
address such a self-interest or intimidation threat is
increasing the client base in the firm to reduce dependence
on the audit client.
 FEES

Audit Clients that are Public Interest Entities

R410.4 Where an audit client is a public interest entity and, for
two consecutive years, the total fees from the client and its
related entities represent more than 15% of the total fees
received by the firm expressing the opinion on the financial
statements of the client, the firm shall:
(a) Disclose to those charged with governance of the audit
client the fact that the total of such fees represents more
than 15% of the total fees received by the firm; and
(b) Discuss whether either of the following actions might be a
safeguard to address the threat created by the total fees
received by the firm from the client, and if so, apply it:
 FEES
(i) Prior to the audit opinion being issued on the second year’s financial
statements, a professional accountant, who is not a member of the
firm expressing the opinion on the financial statements, performs an
engagement quality control review of that engagement; or a
professional body performs a review of that engagement that is
equivalent to an engagement quality control review (“a pre-issuance
review”); or
(ii) After the audit opinion on the second year’s financial statements has
been issued, and before the audit opinion being issued on the third
year’s financial statements, a professional accountant, who is not a
member of the firm expressing the opinion on the financial
statements, or a professional body performs a review of the second
year’s audit that is equivalent to an engagement quality control review
(“a post-issuance review”).
 FEES

R410.5 When the total fees described in paragraph R410.4

significantly exceed 15%, the firm shall determine whether
the level of the threat is such that a post-issuance review
would not reduce the threat to an acceptable level. If so,
the firm shall have a pre-issuance review performed.
R410.6 If the fees described in paragraph R410.4 continue
to exceed 15%, the firm shall each year:
 (a) Disclose to and discuss with those charged with
governance the matters set out in paragraph R410.4; and
 (b) Comply with paragraphs R410.4(b) and R410.5.
 FEES

Fees – Overdue
When a significant part of fees due from an
audit client remains unpaid for a long time, the
firm shall determine:
(a) Whether the overdue fees might be
equivalent to a loan to the client; and
(b) Whether it is appropriate for the firm to be
re-appointed or continue the audit
engagement.
 FEES
Contingent Fees
 A firm shall not charge directly or indirectly a contingent fee for an audit
engagement
 A firm or network firm shall not charge directly or indirectly a contingent
fee for a non-assurance service provided to an audit client, if:
 (a) The fee is charged by the firm expressing the opinion on the financial
statements and the fee is material or expected to be material to that firm;
 (b) The fee is charged by a network firm that participates in a significant
part of the audit and the fee is material or expected to be material to that
firm; or
 (c) The outcome of the non-assurance service, and therefore the amount of
the fee, is dependent on a future or contemporary judgment related to the
audit of a material amount in the financial statements.
 COMPENSATION & EVALUATION
POLICIES
 A firm’s evaluation or compensation policies might
create a self-interest threat
 When an audit team member for a particular audit client
is evaluated on or compensated for selling non-
assurance services to that audit client, the level of the
self-interest threat will depend on:
 (a) What proportion of the compensation or evaluation
is based on the sale of such services;
 (b) The role of the individual on the audit team; and
 (c) Whether the sale of such non-assurance services
influences promotion decisions.
 COMPENSATION & EVALUATION
POLICIES
 Example of action that might eliminate such a
self-interest threat : removing that individual from
the audit team.
 Example of safeguard to address such a self-
interest threat: having an appropriate reviewer
review the work of the audit team member.
 A firm shall not evaluate or compensate a key
audit partner based on that partner’s success in
selling non-assurance services to the partner’s
audit client.
 GIFTS AND HOSPITALITY

 Accepting gifts and hospitality from an audit

client might create a self-interest, familiarity
or intimidation threat.
 A firm, network firm or an audit team
member shall not accept gifts and hospitality
from an audit client, unless the value is trivial
and inconsequential.
 ACTUAL OR THREATENED
LITIGATION
 When litigation with an audit client occurs, or appears likely,
self-interest and intimidation threats are created.
 Factors that are relevant in evaluating the level of such
threats include: ● The materiality of the litigation. ● Whether
the litigation relates to a prior audit engagement.
 If the litigation involves an audit team member, an example of
an action that might eliminate such self-interest and
intimidation threats is removing that individual from the audit
team.
 An example of a safeguard to address such self-interest and
intimidation threats is to have an appropriate reviewer review
the work performed.
 FINANCIAL INTERESTS
 Holding a financial interest in an audit client might
create a self-interest threat.
 A financial interest might be held directly or indirectly
through an intermediary such as a collective
investment vehicle, an estate or a trust.
 Direct financial interest: When a beneficial owner has
control over the intermediary or ability to influence its
investment decisions
 Indirect financial interest: when a beneficial owner has
no control over the intermediary or ability to influence
its investment decisions
 FINANCIAL INTERESTS
 To determine “materiality” of a financial interest, the
combined net worth of the individual and the
individual’s immediate family members may be taken
into account.
 Factors that are relevant in evaluating the level of a
self-interest threat created by holding a financial
interest in an audit client include:
● The role of the individual holding the financial interest.
● Whether the financial interest is direct or indirect.
● The materiality of the financial interest.
 FINANCIAL INTERESTS
Financial Interests Held by the Firm, a Network Firm, Audit Team
Members and Others
 R510.4 A direct financial interest or a material indirect financial
interest in the audit client shall not be held by:
 (a) The firm or a network firm;
 (b) An audit team member, or any of that individual’s immediate
family;
 (c) Any other partner in the office in which an engagement partner
practices in connection with the audit engagement, or any of that
other partner’s immediate family; or
 (d) Any other partner or managerial employee who provides non-
audit services to the audit client, except for any whose involvement
is minimal, or any of that individual’s immediate family.
 FINANCIAL INTERESTS
 As an exception to the foregoing, an immediate family
member may hold a direct or material indirect financial
interest in an audit client, provided that:
 (a) The family member received the financial interest because
of employment rights, for example through pension or share
option plans, and, when necessary, the firm addresses the
threat created by the financial interest; and
 (b) The family member disposes of or forfeits the financial
interest as soon as practicable when the family member has
or obtains the right to do so, or in the case of a stock option,
when the family member obtains the right to exercise the
option.
 FINANCIAL INTERESTS

Financial Interests in an Entity Controlling an

Audit Client
When an entity has a controlling interest in an
audit client and the client is material to the
entity, neither the firm, nor a network firm, nor
an audit team member, nor any of that
individual’s immediate family shall hold a direct
or material indirect financial interest in that
entity.
 FINANCIAL INTERESTS
Financial Interests Held as Trustee
Paragraph R510.4 shall also apply to a financial interest in an audit client held
in a trust for which the firm, network firm or individual acts as trustee, unless:
(a) None of the following is a beneficiary of the trust: the trustee, the audit
team member or any of that individual’s immediate family, the firm or a
network firm;
(b) The interest in the audit client held by the trust is not material to the trust;
(c) The trust is not able to exercise significant influence over the audit client;
and
(d) None of the following can significantly influence any investment decision
involving a financial interest in the audit client: the trustee, the audit team
member or any of that individual’s immediate family, the firm or a network
firm.
 FINANCIAL INTERESTS
Financial Interests in Common with the Audit Client
R510.8 (a) A firm, or a network firm, or an audit team member, or any of
that individual’s immediate family shall not hold a financial interest in an
entity when an audit client also has a financial interest in that entity,
unless:
(i) The financial interests are immaterial to the firm, the network firm,
the audit team member and that individual’s immediate family
member and the audit client, as applicable; or
(ii) The audit client cannot exercise significant influence over the entity.
(b) Before an individual who has a financial interest described in
paragraph R510.8(a) can become an audit team member, the individual or
that individual’s immediate family member shall either: (i) Dispose of the
interest; or (ii) Dispose of enough of the interest so that the remaining
interest is no longer material.
 FINANCIAL INTERESTS
Financial Interests Received Unintentionally
R510.9 If a firm, a network firm or a partner or employee of the firm or a network
firm, or any of that individual’s immediate family, receives a direct financial
interest or a material indirect financial interest in an audit client by way of an
inheritance, gift, as a result of a merger or in similar circumstances and the
interest would not otherwise be permitted to be held under this section, then:
(a) If the interest is received by the firm or a network firm, or an audit team
member or any of that individual’s immediate family, the financial interest shall
be disposed of immediately, or enough of an indirect financial interest shall be
disposed of so that the remaining interest is no longer material; or (b) (i) If the
interest is received by an individual who is not an audit team member, or by any
of that individual’s immediate family, the financial interest shall be disposed of as
soon as possible, or enough of an indirect financial interest shall be disposed of so
that the remaining interest is no longer material; and (ii) Pending the disposal of
the financial interest, when necessary the firm shall address the threat created.
 LOANS AND GUARANTEES
 A loan or a guarantee of a loan with an audit client might
create a self-interest threat
 A firm, a network firm, an audit team member, or any of that
individual’s immediate family shall not make or guarantee a
loan to an audit client unless the loan or guarantee is
immaterial to: (a) The firm, the network firm or the individual
making the loan or guarantee, as applicable; and (b) The client
 A firm, a network firm, an audit team member, or any of that
individual’s immediate family shall not accept a loan, or a
guarantee of a loan, from an audit client that is a bank or a
similar institution unless the loan or guarantee is made under
normal lending procedures, terms and conditions.
 LOANS AND GUARANTEES
 A firm, a network firm, an audit team member, or any of that
individual’s immediate family shall not have deposits or a
brokerage account with an audit client that is a bank, broker or
similar institution, unless the deposit or account is held under
normal commercial terms.
Loans and Guarantees with an Audit Client that is Not a Bank or
Similar Institution
 A firm, a network firm, an audit team member, or any of that
individual’s immediate family shall not accept a loan from, or have
a borrowing guaranteed by, an audit client that is not a bank or
similar institution, unless the loan or guarantee is immaterial to:
(a) The firm, the network firm, or the individual receiving the loan
or guarantee, as applicable; and (b) The client.
 BUSINESS RELATIONSHIPS
 A firm, a network firm or an audit team member shall not have a close
business relationship with an audit client or its management unless any
financial interest is immaterial and the business relationship is
insignificant to the client or its management and the firm, the network
firm or the audit team member, as applicable
 A firm, a network firm, an audit team member, or any of that individual’s
immediate family shall not have a business relationship involving the
holding of an interest in a closely-held entity when an audit client or a
director or officer of the client, or any group thereof, also holds an
interest in that entity, unless: (a) The business relationship is insignificant
to the firm, the network firm, or the individual as applicable, and the
client; (b) The financial interest is immaterial to the investor or group of
investors; and (c) The financial interest does not give the investor, or
group of investors, the ability to control the closely-held entity.
 FAMILY AND PERSONAL
RELATIONSHIPS
 Family or personal relationships with client personnel might
create a self-interest, familiarity or intimidation threat.
 An individual shall not participate as an audit team member
when any of that individual’s immediate family:
 (a) Is a director or officer of the audit client;
 (b) Is an employee in a position to exert significant influence
over the preparation of the client’s accounting records or
the financial statements on which the firm will express an
opinion; or
 (c) Was in such position during any period covered by the
engagement or the financial statements.
 FAMILY AND PERSONAL
RELATIONSHIPS
 An audit team member shall consult in accordance with firm policies and
procedures if the audit team member has a close relationship with an
individual who is not an immediate or close family member, but who is: (a)
A director or officer of the audit client; or (b) An employee in a position to
exert significant influence over the preparation of the client’s accounting
records or the financial statements on which the firm will express an
opinion.
 Partners and employees of the firm shall consult in accordance with firm
policies and procedures if they are aware of a personal or family
relationship between: (a) A partner or employee of the firm or network firm
who is not an audit team member; and (b) A director or officer of the audit
client or an employee of the audit client in a position to exert significant
influence over the preparation of the client’s accounting records or the
financial statements on which the firm will express an opinion.
 RECENT SERVICE WITH AN
AUDIT CLIENT
 If an audit team member has recently served as a
director or officer, or employee of the audit client, a self-
interest, self-review or familiarity threat might be
created
 The audit team shall not include an individual who,
during the period covered by the audit report: (a) Had
served as a director or officer of the audit client; or (b)
Was an employee in a position to exert significant
influence over the preparation of the client’s accounting
records or the financial statements on which the firm
will express an opinion.
SERVING AS A DIRECTOR OR OFFICER
OF AN AUDIT CLIENT
 A partner or employee of the firm or a network firm
shall not serve as a director or officer of an audit client
of the firm.
 A partner or employee of the firm or a network firm
shall not serve as Company Secretary for an audit client
of the firm, unless: (a) This practice is specifically
permitted under local law, professional rules or practice;
(b) Management makes all relevant decisions; and (c)
The duties and activities performed are limited to those
of a routine and administrative nature, such as
preparing minutes and maintaining statutory returns.
 EMPLOYMENT WITH AN AUDIT
CLIENT
 Employment relationships with an audit client might create a self-interest,
familiarity or intimidation threat.
 The firm shall ensure that no significant connection remains between the firm or a
network firm and:
 (a) A former partner who has joined an audit client of the firm; or
 (b) A former audit team member who has joined the audit client, if either has
joined the audit client as: (i) A director or officer; or (ii) An employee in a position
to exert significant influence over the preparation of the client’s accounting
records or the financial statements on which the firm will express an opinion. A
significant connection remains between the firm or a network firm and the
individual, unless: (a) The individual is not entitled to any benefits or payments
from the firm or network firm that are not made in accordance with fixed pre-
determined arrangements;
 (b) Any amount owed to the individual is not material to the firm or the network
firm; and (c) The individual does not continue to participate or appear to
participate in the firm’s or the network firm’s business or professional activities.
 EMPLOYMENT WITH AN AUDIT
CLIENT
 A firm or network firm shall have policies and procedures that
require audit team members to notify the firm or network firm when
entering employment negotiations with an audit client.
 if an individual who was a key audit partner with respect to an audit
client that is a public interest entity joins the client as: (a) A director
or officer; or (b) An employee in a position to exert significant
influence over the preparation of the client’s accounting records or
the financial statements on which the firm will express an opinion,
independence is compromised unless, subsequent to the individual
ceasing to be a key audit partner: (i) The audit client has issued
audited financial statements covering a period of not less than
twelve months; and (ii) The individual was not an audit team
member with respect to the audit of those financial statements.
 EMPLOYMENT WITH AN AUDIT
CLIENT
 If an individual who was the Senior or Managing Partner
(Chief Executive or equivalent) of the firm joins an audit
client that is a public interest entity as:
 (a) A director or officer; or
 (b) An employee in a position to exert significant
influence over the preparation of the client’s accounting
records or the financial statements on which the firm
will express an opinion, independence is compromised,
unless twelve months have passed since the individual
was the Senior or Managing Partner (Chief Executive or
equivalent) of the firm.
 TEMPORARY PERSONNEL
ASSIGNMENTS
 The loan of personnel to an audit client might create a self-
review, advocacy or familiarity threat
 A firm or network firm shall not loan personnel to an audit
client unless:
 (a) Such assistance is provided only for a short period of
time;
 (b) The personnel are not involved in providing non-
assurance services that would not be permitted under
Section 600 and its subsections; and
 (c) The personnel do not assume management
responsibilities and the audit client is responsible for
directing and supervising the activities of the personnel
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

 When an individual is involved in an audit engagement over a long

period of time, familiarity and self-interest threats might be
created
 If a firm decides that the level of the threats created can only be
addressed by rotating the individual off the audit team, the firm
shall determine an appropriate period during which the individual
shall not: (a) Be a member of the engagement team for the audit
engagement; (b) Provide quality control for the audit
engagement; or (c) Exert direct influence on the outcome of the
audit engagement. The period shall be of sufficient duration to
allow the familiarity and self-interest threats to be addressed. In
the case of a public interest entity, paragraphs R540.5 to R540.20
also apply.
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

 In respect of an audit of a public interest entity, an

individual shall not act in any of the following
roles, or a combination of such roles, for a period
of more than seven cumulative years (the “time-
on” period): (a) The engagement partner; (b) The
individual appointed as responsible for the
engagement quality control review; or (c) Any
other key audit partner role. After the time-on
period, the individual shall serve a “cooling-off”
period.
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

Cooling-off Period
 If the individual acted as the engagement partner for seven
cumulative years, the cooling-off period shall be five
consecutive years
 Where the individual has been appointed as responsible for
the engagement quality control review and has acted in that
capacity for seven cumulative years, the cooling-off period
shall be three consecutive years.
 If the individual has acted as a key audit partner other than in
the capacities set out in paragraphs R540.11 and R540.12 for
seven cumulative years, the cooling-off period shall be two
consecutive years.
LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT

For the duration of the relevant cooling-off period, the individual shall not: (a) Be an
engagement team member or provide quality control for the audit engagement;
(b) Consult with the engagement team or the client regarding technical or industry-
specific issues, transactions or events affecting the audit engagement (other than
discussions with the engagement team limited to work undertaken or conclusions
reached in the last year of the individual’s time-on period where this remains relevant
to the audit);
(c) Be responsible for leading or coordinating the professional services provided by
the firm or a network firm to the audit client, or overseeing the relationship of the firm
or a network firm with the audit client; or
(d) Undertake any other role or activity not referred to above with respect to the audit
client, including the provision of nonassurance services that would result in the
individual:
(i) Having significant or frequent interaction with senior management or those
charged with governance; or
(ii) (Exerting direct influence on the outcome of the audit engagement.
PROVISION OF NON-ASSURANCE
SERVICES TO AN AUDIT CLIENT
 Providing non-assurance services to audit clients
might create threats to compliance with the
fundamental principles and threats to independence
 Before a firm or a network firm accepts an
engagement to provide a non-assurance service to
an audit client, the firm shall determine whether
providing such a service might create a threat to
independence
 A firm or a network firm shall not assume a
management responsibility for an audit client.
 ACCOUNTING AND BOOKKEEPING
SERVICES
 Providing accounting and bookkeeping services to an
audit client might create a self-review threat.
 A firm or a network firm shall not provide to an audit
client that is not a public interest entity accounting and
bookkeeping services including preparing financial
statements on which the firm will express an opinion or
financial information which forms the basis of such
financial statements, unless: (a) The services are of a
routine or mechanical nature; and (b) The firm addresses
any threats that are created by providing such services
that are not at an acceptable level.
 ACCOUNTING AND BOOKKEEPING
SERVICES
 Subject to paragraph R601.7, a firm or a
network firm shall not provide to an audit
client that is a public interest entity
accounting and bookkeeping services
including preparing financial statements on
which the firm will express an opinion or
financial information which forms the basis of
such financial statements.
 ADMINISTRATIVE SERVICES

 Providing administrative services to an audit

client does not usually create a threat
 VALUATION SERVICES
 Providing valuation services to an audit client might create a
self-review or advocacy threat.
 A firm or a network firm shall not provide a valuation service
to an audit client that is not a public interest entity if: (a) The
valuation involves a significant degree of subjectivity; and (b)
The valuation will have a material effect on the financial
statements on which the firm will express an opinion
 A firm or a network firm shall not provide a valuation service
to an audit client that is a public interest entity if the valuation
service would have a material effect, individually or in the
aggregate, on the financial statements on which the firm will
express an opinion.
 TAX SERVICES
 Providing tax services to an audit client might
create a self-review or advocacy threat.
 Providing tax return preparation services does not
usually create a threat.
 A firm or a network firm shall not prepare tax
calculations of current and deferred tax liabilities
(or assets) for an audit client that is a public interest
entity for the purpose of preparing accounting
entries that are material to the financial statements
on which the firm will express an opinion
 TAX SERVICES
 A firm or a network firm shall not provide tax planning and
other tax advisory services to an audit client when the
effectiveness of the tax advice depends on a particular
accounting treatment or presentation in the financial
statements and:
 (a) The audit team has reasonable doubt as to the
appropriateness of the related accounting treatment or
presentation under the relevant financial reporting
framework; and
 (b) The outcome or consequences of the tax advice will have
a material effect on the financial statements on which the
firm will express an opinion.
 TAX SERVICES
 Providing tax valuation services to an audit client
might create a self-review or advocacy threat
 A firm or a network firm shall not provide tax services
that involve assisting in the resolution of tax disputes
to an audit client if: (a) The services involve acting as
an advocate for the audit client before a public
tribunal or court in the resolution of a tax matter; and
 (b) The amounts involved are material to the financial
statements on which the firm will express an opinion.
 INTERNAL AUDIT SERVICES
 Providing internal audit services to an audit client might create a selfreview threat.
 When providing an internal audit service to an audit client, the firm shall be satisfied
that:
 (a) The client designates an appropriate and competent resource, preferably within
senior management, to: (i) Be responsible at all times for internal audit activities;
and (ii) Acknowledge responsibility for designing, implementing, monitoring and
maintaining internal control. (b) The client’s management or those charged with
governance reviews, assesses and approves the scope, risk and frequency of the
internal audit services;
 (c) The client’s management evaluates the adequacy of the internal audit services
and the findings resulting from their performance;
 (d) The client’s management evaluates and determines which recommendations
resulting from internal audit services to implement and manages the
implementation process; and
 (e) The client’s management reports to those charged with governance the
significant findings and recommendations resulting from the internal audit services.
 INTERNAL AUDIT SERVICES
 A firm or a network firm shall not provide internal audit
services to an audit client that is a public interest entity, if
the services relate to:
 (a) A significant part of the internal controls over financial
reporting;
 (b) Financial accounting systems that generate information
that is, individually or in the aggregate, material to the
client’s accounting records or financial statements on which
the firm will express an opinion; or
 (c) Amounts or disclosures that are, individually or in the
aggregate, material to the financial statements on which the
firm will express an opinion.
 INFORMATION TECHNOLOGY
SYSTEMS SERVICES
 Providing information technology (IT) systems services to an audit client
might create a self-review threat.
 When providing IT systems services to an audit client, the firm or network
firm shall be satisfied that:
 (a) The client acknowledges its responsibility for establishing and
monitoring a system of internal controls;
 (b) The client assigns the responsibility to make all management decisions
with respect to the design and implementation of the hardware or software
system to a competent employee, preferably within senior management;
 (c) The client makes all management decisions with respect to the design
and implementation process;
 (d) The client evaluates the adequacy and results of the design and
implementation of the system; and
 (e) The client is responsible for operating the system (hardware or software)
and for the data it uses or generates.
 INFORMATION TECHNOLOGY
SYSTEMS SERVICES
 A firm or a network firm shall not provide IT
systems services to an audit client that is a public
interest entity if the services involve designing or
implementing IT systems that: (a) Form a
significant part of the internal control over
financial reporting; or
 (b) Generate information that is significant to the
client’s accounting records or financial statements
on which the firm will express an opinion.
LITIGATION SUPPORT SERVICES

 Providing certain litigation support services

to an audit client might create a self-review
or advocacy threat.
 LEGAL SERVICES

 Providing legal services to an audit client might

create a self-review or advocacy threat.
 A partner or employee of the firm or the network
firm shall not serve as General Counsel for legal
affairs of an audit client.
 A firm or a network firm shall not act in an
advocacy role for an audit client in resolving a
dispute or litigation when the amounts involved
are material to the financial statements on which
the firm will express an opinion
 RECRUITING SERVICES
 Providing recruiting services to an audit client might create a self-
interest, familiarity or intimidation threat.
 When a firm or network firm provides recruiting services to an
audit client, the firm shall be satisfied that:
 (a) The client assigns the responsibility to make all management
decisions with respect to hiring the candidate for the position to a
competent employee, preferably within senior management; and
 (b) The client makes all management decisions with respect to
the hiring process, including: ● Determining the suitability of
prospective candidates and selecting suitable candidates for the
position. ● Determining employment terms and negotiating
details, such as salary, hours and other compensation.
 CORPORATE FINANCE SERVICES

 Providing corporate finance services to an audit client might create a self-

review or advocacy threat.
 A firm or a network firm shall not provide corporate finance services to an
audit client that involve promoting, dealing in, or underwriting the audit
client’s shares.
 A firm or a network firm shall not provide corporate finance advice to an
audit client where the effectiveness of such advice depends on a particular
accounting treatment or presentation in the financial statements on which
the firm will express an opinion and: (a) The audit team has reasonable
doubt as to the appropriateness of the related accounting treatment or
presentation under the relevant financial reporting framework; and
 (b) The outcome or consequences of the corporate finance advice will have
a material effect on the financial statements on which the firm will express
an opinion.